The Energy Stakes of the Ukrainian Crisis
The Ukraine crisis has put the interdependence between the West, the EU and the Russian federation in the limelight. A further deterioration of the relationship between them could have disastrous results for both, as the stakes at hand are high and of strategic value.
The first victim is the present-day suspension of the South Stream project, which would be the only way of transporting gas into the EU markets without having to rely on the Ukrainian transmission system. Any disruption of the flow of gas through Ukraine's territory would present a heavy blow for countries such as Bulgaria, Greece, Serbia and also Italy, and Austria that will be forced to source LNG from international spot markets (up to 70% of today’s prices).
Needless to say, LNG is not an alternative but an emergency solution since there is no infrastructure capable of absorbing and replacing incoming Russian gas flow, according to official calculations by the aforementioned countries.
The Greek Energy Ministry recently relayed that its national company DEPA has approximately 20 days of reserves in case of a cut of the flow of Russian gas and depending on winter weather conditions, additional LNG shipments will be needed that eventually would be paid for by the customers via higher bills at a time when the local industry's competitiveness is already badly hurt by the ongoing economic crisis.
It should be noted that Sofia and Moscow recently seem to have reached a modus vivendi under a change in the legal framework and terminology of the Bulgarian onshore South Stream’s route that could accommodate EU's third energy package objections. In that sense the Bulgarian portion will be renamed so as to comply at least nominally with EU rules. Of course the issue has now reached a political climax, thus the upcoming Bulgarian early parliamentary elections will certainly shed more light of the actual intentions of that country.
Strategic investments at stake: The long-term 500 billion USD Rosneft-Exxon-Mobil cooperation framework that deals with a decade’s long extraction of oil and gas in the Arctic, Western and Eastern Siberia and the Black Sea. In order to get a grip of the stakes involved, in early August 2014, one of the joint ventures of these companies, named Karmorneftegaz, announced that total recoverable resources of hydrocarbons in the Kara Sea being currently explored could amass to around 85 billion barrels which in today’s prices it is translated roughly in 8.5 trillion USD.
Exxon has also agreed to back up the establishment of the Arctic Research Center in Saint Petersburg and collaborate with Roseneft's research and development centers in Krasnodar, Samara, Ufa, and Krasnoyarsk. The total budget for all the above along with the link of those with the ExxonMobil's Upstream Research Center in Houston is reported to cost around 500 million USD. A first sign that the Western sanctions have caused strong resentment by Moscow in terms of the global strategic energy game is the intention of selling out a 50% stake of the Vankor oil-gas field in Siberia to the Chinese CNPC instead of a Western company. The reserve contains 3.8 billion barrels of oil and 100 bcm of gas and is considered to be a part of a wider geological formation with similar findings. Thus in a total shutdown of West-Russia energy relations the Chinese state companies look like they will fill the gap both in terms of financing, technology and most importantly property of the fields.
Norwegian state champion Statoil is also in strategic collaboration with Rosneft in the Barents Sea, which according to recent Oslo energy sources may contain 8 billion barrels of oil equivalent, worth some 800 billion USD in today’s nominal prices. Statoil is also eager to contribute to exploring shale and tight oil & gas reserves in Western Siberia that are said to contain at least 85 billion barrels of oil.
The Norwegian-owned Seadrill Limited and North Atlantic Drilling have also teamed up with Rosneft as of late August to supply offshore drilling platforms and equipment for the propose of long-term research and explorations in the Barents and Artic seas.
Regarding the prospect of a pan-European natural gas economic shock due to a stop of the flow of Russian gas in Europe, the Institute of Energy Economics of the University of Cologne assessed the following: Finland would be a country first and most harshly affected since 100% of its gas comes from Russia and it does not have substantial storage facilities. An embargo of more than 90 days will strongly impact Poland, Turkey, Germany, Austria, Balkan countries and Baltic states. A nine month stoppage will affect the whole Continent with severe breakdowns of the system, huge amounts of emergency LNG supplies that will skyrocket the prices - and in a global spot market scale. Of course Gazprom would lose its best customer base and the Russian budget will probably suffer a 8-13% decrease in yearly revenues. Nevertheless, should the situation reach that point, it would simply mean a warlike situation in Europe is rooted, thus budgetary considerations will be cast aside by all sides, and history in the region will turn backwards, perhaps one hundred years.